How to Figure Out the Cost of Taxes on Your Car

Leasing a car requires a slightly different budget from buying a car, with a first payment, a security deposit, a bank fee and more all due at signing. Unlike a standard car purchase, a lease requires a tax to be paid on the down payment (that is, if you're required to make one) and on monthly payments. Like a standard car purchase, these are sales taxes levied by the state and individual municipalities.

Lots of car commercials put monthly lease payments in big numbers at the end of the ad. Right underneath that enticingly low monthly number, however, is a dollar amount for cash due at signing. This includes all the fees associated with leasing a car and the taxes due on the down payment. Some states also tax the fees you pay at signing.

Each month, your payment will be taxed, too. While this sounds sneaky and terrible, it's not so bad. This way, you're only paying taxes on the car for as long as you lease it. A couple of states, like Illinois and Texas, do require you to pay the full amount of the sales tax up front. This tax can be rolled into the amount of the monthly lease payment [source: LeaseGuide.com].

The bottom line is this: Whether you're purchasing a new or used car or leasing a car for a specified time, state and local sales taxes will be applied. It's probably best to know what your local tax rate is and add it to your budget before you even begin shopping for a new car. That way, you're sure to minimize surprises on the day you drive your new car home.

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